It's a horror film, set in London, Los Angeles

Uncertainty about UK tax breaks for films has forced the production of Garfield in London, the sequel to the minor piece of family hokum about a wise-cracking cat, to relocate to Los Angeles. Bar a few authentic shots, the Holly-wood hills will have to stand in for London's gritty streets.

Comical as it sounds, Britain's film industry is not laughing. More and more productions are moving elsewhere, leaving British post-production teams and set designers in despair. Just last year, according to the UK Film Council, the number of people employed in film and video production fell by 20pc from 31,264 to 24,816.

Tomorrow, the last responses to the Government's new draft legislation on film subsidies will be filed and they won't make comfortable reading. British film is under threat, the country's finest producers will say. Not from some pyrotechnic Hollywood director, but from our home-grown tax regime.

The villain of the piece is Gordon Brown, ably assisted by his paymaster general at the Treasury, Dawn Primarolo. The two of them are reforming the system of tax breaks that subsidise the industry to prevent wealthy individuals taking advantage of the loopholes. But the new draft legislation, published on July 30, threatens to undermine the UK's ability to compete.

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Peter James, a financier, said: "The incentives the UK Government provides need to be equivalent to the US. In quite a few states, you get 15pc of your budget subsidised. If the Government wants to attract overseas film-making, it needs to match that."

The current draft proposals don't. According to Tim Adler, editor of Screen Finance: "There are two problems. First, if you make a film with foreign partners your subsidy will shrink from 15pc under the old proposals to 7pc-8pc. The bigger fear is that the subsidy for Hollywood productions in the UK will shrink by about the same amount as well."

The only beneficiary of the changes is "a wholly British film made for under £20m - something like Kinky Boots", he added. Productions like Roman Polanski's Oliver Twist would probably vanish from these shores.

As good as small, British productions may be they will not sustain an industry that has expanded enormously on the back of the Chancellor's previously generous system of subsidies. Inward investment from bigger overseas productions is already predicted to tumble from £549m to £324m this year.

Not surprisingly, the industry is worried. One senior source said: "Business will be lost if there isn't movement on this issue." Pinewood Shepperton, chaired by BBC chairman Michael Grade, has already felt the squeeze.

The Watchmen, a comic book adaptation and big budget release, was withdrawn from its studio and it blamed confusion over the tax regime for pushing it into the red.

Ms Primarolo has insisted that she wants "the UK to continue to be recognised as one of the best places in the world to make a film". But financiers say her words are not being matched by her actions and artistic concerns are running a distant second to the Treasury's financial worries.

Even so, it is easy to see why the Government decided to change the rules. "They had had enough of financiers making millions out of their largesse," Mr Adler explains.

Under the old Section 48 tax arrangement, the beneficiaries were wealthy individuals who put up the funds for a movie. Those investors, typically rich movie stars and City bankers with large bonuses, exploited a loophole that allowed them to significantly reduce their tax payments.

The arrangement attracted enough money to finance roughly 15pc of most British films' budgets. In 2003, investment peaked, lifting the industry's turnover to a record £1.2billion. This year it is expected to fall below £700m.

By attracting funds, the tax loophole worked as a subsidy for the film industry, albeit indirectly. However, the idea of wealthy bankers enriching themselves at the taxpayer's expense did not sit easily with the Chancellor.

Last September, the Treasury proposed changing the system to make the direct beneficiaries the producers themselves. With promises of a greater, 20pc subsidy, the industry initially supported the plan. But Mr Brown's proposals have started to unravel. Only certain British elements of a film will qualify for tax relief, reducing the headline 20pc figure to a more practical 7pc-8pc.

Of more concern, though, is how producers will raise the funds at all. The new subsidy is only applicable after a film is complete, and "banks won't lend the money up front," says Tim Levy, of financiers Future Film Group.

The level of subsidy depends on several things - including the degree to which it is a British production and its box office success. As banks cannot be sure exactly what the tax credit will be, they are reluctant to lend.

The new regime is scheduled to come into force on April 1 next year.

As Mr James says: "If this is not properly resolved, an awful lot of production will go overseas."